There is a deceptively simple rule at the heart of making a compliant SME R&D tax claim: the expenditure must be paid. Not promised, not accrued, and not estimated — but paid. This requirement, grounded in Part 13 of the Corporation Tax Act 2009 (CTA 2009), has been the subject of two important tribunal decisions. Together, they shed light on how rigidly HMRC and the courts will interpret the word “payment” and under what circumstances the condition is satisfied.
The Legal Foundation
The legislation is clear. Under CTA 2009, section 1053(1)(a) requires that qualifying subcontractor costs must be “incurred in making the qualifying element of a subcontractor payment”. That phrase in turn relies on section 1133, which defines a “subcontractor payment” as a payment made by a company to another person in respect of R&D work.
So, in law, payment means payment — an actual financial transaction must take place. It is not sufficient for the liability to be recognised in the accounts or for the amount to be due. If no payment has been made, then the company has not met the condition and the expenditure cannot be included in the R&D claim.
The Gas Recovery and Recycle Decision
In Gas Recovery and Recycle Ltd v HMRC [2016] UKFTT 746 (TC), case summary below, the tribunal rejected a claim for an additional deduction and tax credit where no payment had been made by the end of the accounting period. The company had accounted for the subcontractor cost and even later paid part of the sum — but too late. The tribunal held that R&D relief is only available for expenditure that has actually been paid within the accounting period for which the claim is made. HMRC had historically taken a more generous position, allowing claims where payment was made before submission, but the tribunal overruled this. But practically HMRC do not insist on payment in the accounting period, just before the claim is made.
The ruling is unequivocal: no payment, no claim. Expenditure incurred but unpaid is not valid for R&D relief under the SME scheme. In essence you cannot claim on credit.
The Broader View in Tills Plus
More recently, in Tills Plus Ltd v HMRC [2024] UKFTT 614 (TC), case summary below, the tribunal dealt with a more complex scenario involving third-party payments. In this case, the company’s R&D subcontractors were paid directly by a director's relative, using funds ultimately treated as a director’s loan to the company. Although the payment was not made from the company’s own bank account, it was accepted that the company had become liable to repay the loan and that the payment discharged the company’s debt.
The tribunal ruled that this constituted a valid payment under section 1133, provided the cost fell on the company and the liability to the subcontractor was discharged. The judges adopted a purposive reading of the legislation, rejecting HMRC’s argument that payment must literally flow from the company’s bank account. They concluded that what matters is that the subcontractor has been paid and the company bears the economic cost. The case was won on this ground but all was lost on the second issue qualification.
What This Means in Practice
In Gas Recovery, there was simply no payment at all by the claim filing date. In Tills Plus, the subcontractors were actually paid before the claim was made, and the financial burden ultimately rested with the company.
This leaves us with two key criteria for satisfying the “payment condition” in an R&D claim:
- The subcontractor must have received actual payment.
- The cost of that payment must ultimately fall on the company claiming relief.
These points must be demonstrably true before the R&D claim is submitted. If the subcontractor has not been paid, the cost cannot be claimed. If someone else has paid on behalf of the company, then the company must be able to prove that it is financially responsible for that payment, such as through a properly documented director’s loan.
Final Thoughts
While the SME scheme provides generous reliefs, it also demands strict compliance with a detailed statutory code. As both Gas Recovery and Tills Plus show, a company must not assume that intentions, accruals, or future payments will suffice. The R&D rules, as expressed in CTA 2009, are clear: no payment, no relief.
If your claim involves deferred payments, loans, or third-party settlements, it is essential to get advice on whether the “payment condition” is truly satisfied. Submitting a claim that includes unpaid expenditure risks HMRC challenge and disqualification of part, or all, of the relief.
For further guidance or to discuss your R&D tax relief eligibility, speak to us directly via our contact page.
Christopher Toms MA MAAT
Compliance Director
RandDTax